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Does Central Bank Transparency Reduce Interest Rates?

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  • Eijffinger, Sylvester
  • Geraats, Petra
  • van der Cruijsen, Carin

Abstract

Central banks have become increasingly transparent during the last decade. One of the main benefits of transparency predicted by theoretical models is that it enhances the credibility, reputation, and flexibility of monetary policy, which suggests that increased transparency should result in lower nominal interest rates. This paper exploits a detailed transparency data set to investigate this relationship for eight major central banks. It appears that for all central banks, the level of interest rates is affected by the degree of central bank transparency. In particular, the majority of the improvements in transparency are associated with significant effects on interest rates, controlling for economic conditions. In most of these cases, interest rates are lower, often by around 50 basis points, although in some instances transparency appears to have had a detrimental effect on interest rates.

Suggested Citation

  • Eijffinger, Sylvester & Geraats, Petra & van der Cruijsen, Carin, 2006. "Does Central Bank Transparency Reduce Interest Rates?," CEPR Discussion Papers 5526, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5526
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    Cited by:

    1. Ivana Komunjer & Michael T. Owyang, 2012. "Multivariate Forecast Evaluation and Rationality Testing," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1066-1080, November.
    2. Klaus Schmidt-Hebbel, 2012. "Fiscal Institutions in Resource-Rich Economies: Lessons from Chile and Norway," Documentos de Trabajo 416, Instituto de Economia. Pontificia Universidad Católica de Chile..
    3. René Tapsoba, 2012. "Does Inflation Targeting Matter for Attracting Foreign Direct Investment into Developing Countries?," CERDI Working papers halshs-00667203, HAL.
    4. Neuenkirch, Matthias, 2012. "Managing financial market expectations: The role of central bank transparency and central bank communication," European Journal of Political Economy, Elsevier, vol. 28(1), pages 1-13.
    5. Klaus Schmidt-Hebbel, 2012. "Fiscal Policy for Commodity Exporting Countries: Chile's Experience," Documentos de Trabajo 415, Instituto de Economia. Pontificia Universidad Católica de Chile..
    6. Rosa, Carlo & Verga, Giovanni, 2007. "On the consistency and effectiveness of central bank communication: Evidence from the ECB," European Journal of Political Economy, Elsevier, vol. 23(1), pages 146-175, March.
    7. Papadamou, Stephanos & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2014. "Does central bank transparency affect stock market volatility?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 362-377.
    8. Eijffinger, Sylvester & van der Cruijsen, Carin, 2007. "The Economic Impact of Central Bank Transparency: A Survey," CEPR Discussion Papers 6070, C.E.P.R. Discussion Papers.
    9. Andrieş, Alin Marius & Nistor, Simona & Sprincean, Nicu, 2020. "The impact of central bank transparency on systemic risk—Evidence from Central and Eastern Europe," Research in International Business and Finance, Elsevier, vol. 51(C).
    10. Meredith J. Beechey, 2008. "Lowering the anchor: how the Bank of England's inflation-targeting policies have shaped inflation expectations and perceptions of inflation risk," Finance and Economics Discussion Series 2008-44, Board of Governors of the Federal Reserve System (U.S.).
    11. Papadamou, Stephanos & Siriopoulos, Costas, 2014. "Interest rate risk and the creation of the Monetary Policy Committee: Evidence from banks’ and life insurance companies’ stocks in the UK," Journal of Economics and Business, Elsevier, vol. 71(C), pages 45-67.
    12. Adonias Evaristo Costa Filho & Fabiana Rocha, 2008. "Comunicação e política monetária no Brasil," Working Papers 08_17, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    13. Eijffinger, Sylvester & Tesfaselassie, Mewael F., 2007. "Central Bank forecasts and disclosure policy: Why it pays to be optimistic," European Journal of Political Economy, Elsevier, vol. 23(1), pages 30-50, March.
    14. da Costa Filho, Adonias Evaristo & Rocha, Fabiana, 2009. "Communication, transparency, monetary policy index, central bank watching," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 63(4), December.
    15. Petra Geraats, 2014. "Monetary Policy Transparency," CESifo Working Paper Series 4611, CESifo.
    16. Stephen G. Cecchetti & Kermit L. Schoenholtz, 2010. "How Central Bankers See It: The First Decade of European Central Bank Policy and Beyond," NBER Chapters, in: Europe and the Euro, pages 327-374, National Bureau of Economic Research, Inc.
    17. van der Cruijsen, C.A.B., 2008. "The economic impact of central bank transparency," Other publications TiSEM 86c1ba91-1952-45b4-adac-8, Tilburg University, School of Economics and Management.
    18. Marie Brière & Ombretta Signori, 2011. "Inflation hedging portfolios in different regimes," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 139-163, Bank for International Settlements.
    19. van der Cruijsen, Carin & Demertzis, Maria, 2007. "The impact of central bank transparency on inflation expectations," European Journal of Political Economy, Elsevier, vol. 23(1), pages 51-66, March.
    20. Marie Brière & Ombretta Signori, 2012. "Inflation-Hedging Portfolios : Economic Regimes Matter," Post-Print hal-01494498, HAL.
    21. Tóth, Máté Barnabás, 2006. "Az átláthatóság szerepe a jegybanki stratégiában [The role of transparency in central-bank strategy]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1080-1100.
    22. repec:dau:papers:123456789/9296 is not listed on IDEAS
    23. repec:dau:papers:123456789/7744 is not listed on IDEAS
    24. Comanescu , Anton, 2012. "Central Bank Transparency and Monetary Policy Effectiveness," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 6(4), pages 61-88, July.
    25. Amir Kia, 2011. "Developing a Market-Based Monetary Policy Transparency Index: Evidence from the United States," Economic Issues Journal Articles, Economic Issues, vol. 16(2), pages 53-80, September.

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    More about this item

    Keywords

    Central bank transparency; Monetary policy; Interest rates;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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